Solution

Such preference shares are financial liability because the entity cannot avoid a transfer of cash or another financial asset only by settling the non-financial obligation.

The financial instrument in this case is a preference share issued by LMN Limited to PQR Limited. The preference share has the following features:

1. It is redeemable at the end of 5 years from the date of issue.
2. The issuer has the option to settle the preference share by transferring a commercial building to the holder, instead of making a cash payment.

Based on these features, the preference share can be classified as a financial liability. This is because the holder of the preference share is entitled to receive a fixed rate of return in the form of dividends until the preference share is redeemed. Furthermore, the fact that the issuer has the option to settle the preference share by transferring a commercial building does not change the nature of the instrument as a financial liability.

However, the settlement alternative provided in the instrument creates a non-financial obligation for the issuer. This is because the issuer has a legal obligation to transfer the commercial building if it chooses to settle the preference share in this manner.

Therefore, the preference share issued by LMN Limited to PQR Limited is a financial liability with a non-financial obligation attached to it. The settlement alternative does not change the nature of the instrument as a financial liability, but it creates an additional obligation for the issuer.